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Tax From the Top: Q&A With IRS Commissioner Doug Shulman

In
March 2008, Doug Shulman became the 47th commissioner of the IRS,
after serving as vice chairman of the Financial Industry Regulatory
Authority (FINRA). Within months, the financial crisis hit and the IRS
was given the task of administering a number of new economic stimulus
and tax relief provisions, in addition to its recently launched
enforcement and information reporting initiatives. On top of it all,
the IRS unveiled an ambitious plan to register all paid tax return
preparers. Recently, at his office in Washington, Shulman sat down
with the JofA to take stock of how, after two years at the
helm, he sees the IRS adapting to new realities while fulfilling its
traditional role, and how CPAs and other tax professionals figure in
its mission.

Editor's note: The AICPA Tax Division has
prepared a briefing on the IRS proposals on tax preparer
registration and disclosure of uncertain tax positions. Click here to read more.

JofA: What can you tell CPAs who are concerned about the
preparer registration regulations being developed? Will the
proposed public database of preparers designate CPAs as such?

Shulman:We
ran a very open, transparent, public dialogue about this, which in
my personal opinion is how government should work. We asked for and
received a lot of input, including from the AICPA and others, which
we incorporated into our recommendations. One thing we considered
was that even though the CPA test and bar exams aren’t necessarily
targeted to tax returns, we will let those be the test accountants
or lawyers take, so they won’t have to take another test.

The
issue of the database and how people are designated is something
we’re going to work through. We’re not going to post the database
until after the testing phase. This process is going to be a
multiyear effort. I am well aware that CPAs and others have spent a
lot of time building a distinguishable professional credential that
has a lot of value and means a lot to them and their profession and
their clients. So that will be on our mind as we work through these proposals.

JofA:
What can you tell CPAs who are concerned about the proposed
reporting regime for uncertain tax positions?

Shulman:I
tried to lay it out relatively clearly when I announced it. It’s
part of the broader theme of information reporting and having a
transparent system that is efficient for us and for the tax system.
This issue has been on my mind and on the agency’s mind, and there’s
been a public dialogue about it for two years. This is one of the
first things people talked to me about when I was nominated—even
before I was confirmed: What are we going to do about uncertain tax
positions and tax accrual workpapers?

Right
now, we issue a lot of IDRs [information document requests], rooting
around for information. If we get this information upfront, it
should decrease the information we have to request and decrease the
time of the audit. Right now, we spend anywhere from 10% to 25% of
the time in our large corporate audits looking for information
rather than doing what I think we should be doing in a voluntary
disclosure and compliance system: You report key information to us,
and any dialogues or disagreements are about your facts as they
relate to tax law, not playing hide-and-seek and trying to figure
out what positions you have taken.

First
of all, we’re going to affirm the policy of restraint. We are not
going to ask for the full tax accrual workpapers—which a lot of
people suggested we should do, because we’re legally entitled to
them. Instead, we’ve proposed getting a list of positions and the
maximum exposure to those positions. We’re not going to get the risk
weighting that taxpayers put on each position. We’re not going to
get behind the thoughts and analysis by taxpayers about whether they
will win or lose with the IRS, and if they lose, what are the
chances that they put on that loss and how they analyzed their
position. Those are all things we could have asked for and we
didn’t. What we do say is FIN 48 is a fact; people already do this
work, and we want more transparency. In the conversations I’ve had
since we announced it, generally people have said this makes sense;
it’s a natural evolution. We expect that there will be a lot of
public feedback.

The
real question is, what will the IRS do with this information? I’ve
been very clear that this is not going to create a target for
taxpayers and that we understand that just because you have an
uncertain tax position doesn’t mean that’s an amount of money you
owe to the IRS. Rather, it allows us to get a head start on picking
the right audits and then being able to focus on the issues.

JofA:
How is the IRS coping administratively with the many new
economic recovery and stimulus provisions?

Shulman:The
original mission of the IRS, which was to collect the revenue, has
shifted over time, and now we also distribute a lot of money through
tax credits. We administer a lot of social programs such as the
earned income tax credit and, most recently, a significant portion
of the American Recovery and Reinvestment Act. While in one respect
it clearly creates some difficulties and burden for us, it’s also a
big compliment that we’re seen as a “go-to” agency in government. If
you would have thought 10 or 15 years ago that the IRS would be
asked to do important things because people thought we could execute
quickly, that wasn’t the world we lived in. And it’s really a
testament to this institution that over the last 10 or so years it’s
really proved itself.

With
the Recovery Act, we did everything from quickly getting out
withholding tables for the making work pay credit, to getting a lot
of money into the hands of homebuyers with the first-time homebuyer
credit, to the COBRA provisions to help unemployed Americans keep
their health care. I think these are unprecedented times, and I’m
quite proud of how we stepped up to the plate and quickly delivered
for the American people, for the president, for Congress. But in the
long run, what we need is what other big institutions need: proper
lead time, policy structured in a way that it can be administered,
and then the right personnel and budget resources.

JofA:
What can you tell us about processing the estimated 14,700
voluntary disclosures last fall under the reduced-penalty
program for foreign financial transaction reporting?

Shulman:For
several years, we have been very focused on offshore compliance.
When he was a senator, President Obama emphasized offshore
compliance and then came in and immediately gave us tremendous new
resources for it. [Treasury] Secretary [Timothy] Geithner made this
an agenda item at the G8 [Group of Eight summit].

The
U.S. government is getting very serious about rooting out offshore
tax evasion. And while we’re increasing the risk that you’re going
to get caught if you’re hiding assets overseas, we made an offer
where people could come in and pay their taxes and interest and a
stiff penalty but avoid going to jail. The response was
overwhelming. We would have never imagined that 14,700 people would
come in.

We
are still in the early stages, wading through those returns, looking
at information, at patterns of institutions or advisers who help
people park money overseas and not pay taxes. Where we don’t have
enough information from a taxpayer, we’re digging deeper with
further questions and potential audits. This will be a treasure
trove of information for us to look for and pursue other wrongdoing.

JofA:
Can you say anything about what the government’s next move might
be in the UBS case or other foreign financial transaction
reporting initiatives?

Shulman:Our
offshore compliance effort is a multifaceted and multiyear effort.
Probably, the next big thing, I hope, will be passage of FATCA, the
Foreign Account Tax Compliance Act. A blueprint was put forward by
President Obama in his 2010 budget, and legislation has been
introduced by Senate Finance Committee Chairman Max Baucus, [Former]
House Ways and Means Committee Chairman Charles Rangel and others.
It will require financial institutions doing business as qualified
intermediaries to report more information and do more due diligence,
so it will give us a lot more and better information. If people
don’t sign up to be a QI, there will be withholding at the source.

The
president last year gave us funding to hire 800 new people in our
international operations. In the 2011 budget that was just put
forward, he added funding for another 800 people, so we’re building
up expertise. I’m spending a lot of time with my counterparts in
foreign governments, comparing notes and sharing information, so
international cooperation is being stepped up. We started a
high-wealth unit recently, which will look at the web of finances of
high-wealth American taxpayers, and that will include their foreign
accounts and resources. We are moving on multiple fronts.

JofA:
Broker reporting of basis of securities and third-party network
transactions both seem likely to generate a large quantity of
new information returns. How will the IRS manage processing and
matching them to taxpayers’ returns?

Shulman:We’ve
gotten better and better at using information returns. Right now we
get over a billion information returns; 1099s and W-2s are the most
obvious ones. I’ve been very public that the future of tax
administration is all about more and better third-party information
and continuing to develop our programs to analyze that data and act
on it. The way we’re going to get better at handling the volume and
complexity of both the Tax Code and the business world and
individual finances isn’t by throwing more auditors at the problem;
it’s by doing better data management and analysis.

The
basis reporting is actually pretty straightforward. We’ll get the
information, and we’ll know what your capital gains are. And it will
be much easier for taxpayers. Because right now, when I sell a
stock, I have to go root around, find the basis and figure out what
the capital gain is.

For
credit card reporting, we will get merchant transaction data in
aggregate. We will build features into our technology system so if
we see, say, a pizza parlor that says they had $90,000 of sales last
year and it shows that they had $85,000 of credit card sales and we
know that pizzerias have a lot of cash sales, that will be a red
flag. We’ll use it to better target our audits, to see where there’s
potential noncompliance, and then we’ll use it to better focus our
resources. We’ll run basic algorithms. We’ll put filters on it, as
we do for any information reporting and compliance systems. It
actually should allow us to target taxpayers correctly, so in theory
compliant taxpayers should have actually less burden on them.

JofA:
How well are the enhanced whistleblower award provisions working?

Shulman:It’s
still relatively new but an important tool for tax administration.
In 2008 we had a significant jump in the number of claims. And then
in 2009 we had more claims. The way the law is written is that the
case has to go through full adjudication, so if there’s any Tax
Court proceeding or appeal, you’ve got to get all the way through it
and then the money has to be turned over to the government before
the awards are paid out. So this could take multiple years to get
the awards out. But I’m a big fan of the program. It can help us
identify fraud or tax noncompliance we would have never known about.
I’ve been very clear with everyone in the agency that we’re going to
execute the program well and within the letter of the law. But stay
tuned; we’re still in the early days of it.

JofA:
What are the challenges and solutions in upgrading and
modernizing the IRS’ taxpayer data systems?

Shulman:Big
technology projects are hard, and they’re never linear. You move
forward, you learn some things, you scrap something you do, you move
forward another direction. For any major financial services firm,
any company, that’s how it works. The IRS has been traditionally
underfunded in information technology. The president’s 2011 budget
recognized that and gave us over $100 million in new money to get
our modern account database finished by the end of 2011, ready for
the 2012 filing season.

Also,
we’re like any big institution that needs to think of its technology
as a technology portfolio that has modernization, or new systems,
old systems that you’re keeping running and you’re enhancing, basic
infrastructure—data centers, hardware and servers—and data security
and disaster recovery planning.

We’ve
actually done pretty well at running filing season, keeping things
running with underfunded technology and with a spotlight on us. Now,
though, we are poised to finish what we said we were starting in the
late ’80s, which is have all the core taxpayer account data in a
single database structure, have faster refunds for anyone who
electronically files and gets a direct deposit. One of the
historical problems of the IRS is that you’d call up and correct a
problem in your account, but a week later, because all the batch
cycles hadn’t run, a letter would go out to you, erroneously saying
it was still uncorrected. The systems weren’t
talking to each other. That will be fixed when we get this done, and
we’ll be poised to knock down our material weaknesses and really
move forward with Internet, because we’ll have all our core account
data in one place. So I would say we’re making good progress.

JofA:
When you say “move forward with Internet,” what does that mean?

Shulman:We
have some pretty innovative Internet applications, such as “Where’s My Refund?” But if
you want to keep moving forward and getting different information
and data out to taxpayers on the Internet, you really have to have
your core databases in order. And so, this just sets the stage to
keep us moving toward more and better Internet services.

JofA:
What would you say is the role of CPAs in the tax system?

Shulman: I
think of the tax system as an incredibly big, important system that
touches every adult American, every business, every nonprofit in the
country. And while the IRS is at the center of it, CPAs and other
professionals are integral to it. Our country has a voluntary
compliance tax system where individuals and businesses are trying to
figure out what they owe and send that to the IRS. That means CPAs
should be partners with us, trying to help people get it right,
trying to wade through the complexity of the law in different
business situations. And so I view CPAs as an incredibly important
part of the tax system, helping us with both service to the American
people and with compliance.

Paul
Bonner is
a JofA
senior editor. To comment on this article or to suggest an idea
for another article, contact him at pbonner@aicpa.org or 919-402-4434.

Editor’s note: The AICPA Tax Division prepared this summary.
Click
here for a video update on these issues from AICPA
President and CEO Barry Melancon.

IRS
Commissioner Shulman’s Announcement on Uncertain
Tax Positions

On
Jan. 26, IRS Commissioner Doug Shulman released a new proposalthat would require companies to
disclose “uncertain” tax positions in their annual income tax
return filings (based on FIN 48 as required for financial
accounting purposes). The IRS clarified
that this proposal would not be effective for 2009 tax return
filings, but rather is expected to apply to returns for calendar
2010 and fiscal years that begin in 2010.

This
proposal has many important implications and will generate much
debate. The AICPA recognizes that this proposal will
significantly impact members if it becomes effective as
initially proposed by the IRS, and we are working on an
appropriate response on behalf of our membership. Our task force
is looking at both the policy and technical ramifications of the
proposal including the impact on the auditor-client
relationship, burden on smaller businesses, and ease of
administration.

In
response to requests by the AICPA and other organizations, the
IRS announced
it has extended the deadline from March 29 until June 1, 2010
for filing comments. The IRS expects to release a draft of the
new disclosure schedule and its instructions in early April, so
that the comment submissions can address those documents
as well. The IRS has also added to the list of specific
questions on which it is seeking comment. The AICPA continues to
develop its response. Members who would like to share their
thoughts and concerns with us
should e-mail comments to MemberinputonAnnouncement2010-9@aicpa.org.

The
IRS Announced Plans to Regulate all Tax Return Preparers: CPAs
are Exempted from Education and Testing
Requirement

On
Jan. 4, Shulman announced that the IRS would start phasing in
for the 2011 filing season a process to regulate all paid tax
return preparers. The proposal that will be implemented through
IRS regulations will mandate that all paid tax return preparers
both register with the IRS and obtain a preparer tax
identification number (PTIN), to be used in signing all tax
returns. As a part of this plan, the IRS also will subject paid
tax return preparers to an annual CPE requirement as well as an
entry competency test.

The
proposal generally exempts CPAs from both the testing and CPE
requirements as they have already passed a licensing examination
and are subject to continuing professional education
requirements.

Finally
the IRS plans to require that all preparers be subject to the
ethics requirements under Circular 230.

We
believe having one unique identification number (PTIN) for each
tax return preparer and making all preparers subject to the
ethical standards of Circular 230 would prove a very positive,
resource-efficient program.Under such a
program, the IRS would be able to quickly track and identify the
incompetent or unscrupulous preparers who are bent on harming
the tax administration system.

We
do, however, have concerns about providing preparers who are not
CPAs, attorneys, or enrolled agents with a “certification” based
on limited qualifications and we are particularly concerned with
an examination process that may cause confusion among taxpayers
regarding the relative qualifications of tax return
preparers.

The
AICPA has been actively involved in the process announced by the
IRS commissioner last summer in which he indicated his intention
to undertake this review. We will continue to work with
policymakers as the many details of these proposals are
disclosed; we have already participated in a number of meetings
in anticipation of the release of implementing regulations.We have also engaged members of AICPA’s
governing Council at its regional meetings in March to discuss
important aspects of the IRS proposal.

Specific
details on the proposal are available at the IRS.gov Web
site.

Click here to return to the
JofA's interview with IRS Commissioner Doug
Shulman.

TAX NEWS

President Barack Obama signed legislation that retroactively extended more than 50 expired tax provisions for 2014, allowing taxpayers to take advantage of a host of tax incentives during this filing season.

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